Suppose you group all the stocks in the world into mutually exclusive portfolios (each stock is in only one portfolio): growth stocks and value stocks. Suppose the two portfolios have equal size (in terms of total value), a correlation of 0.6, and the following characteristics: The risk free-rate is 3%.

a. What is the expected return and volatility of the market portfolio (which is a 50-50 combination of the two portfolios)?

b. Calculate the Sharpe ratios of the value stock, growth stock, and market portfolio.

c. Does the CAPM hold in this economy? (Hint: Is the market portfolio efficient?)

Data Table 1 (Click on the icon located on the top-right corner of the data table below in order to copy its contents into a spreadsheet) Volatility 13% 20% Expected Return Value Stocks Growth Stocks 14% 16% Print Done